In 1920, an Italian immigrant tricked thousands of New England residents. He made them invest in a postage stamp speculation scheme. He promised that he could provide a 50 percent return in 90 days. He’d use funds from follow-up investors to pay off earlier ones to create the illusion of a legitimate business. At the height of his scam, he raked in about $3 million a day in today’s money.

When he was caught, this kind of fraud was named after him as a Ponzi scheme.

You would not fall for a Ponzi scheme – would you?

Let’s put that to the test.

What’s the biggest and most famous investment opportunity everyone talks about in those days? Right, the IPO of 5% of the National Oil company of Saudi Arabia, Saudi Aramco. And for quite a while now, we have been exposed to all sorts of numbers shooting for superlatives.

The biggest company. The biggest IPO. The biggest bonuses. This is the mother of investment opportunities.

But those numbers – how solid are they? Can we trust them?

Saudi Aramco has existed – in one form or another – for more than half a century. It has generated enough profits to make Saudi Arabia one of the wet dreams of anyone hoping to strike it rich.

Arabian princes were not known for their fabulous riches only about 100 years ago. They were known for desert, camels, and wild Lawrence of Arabia style romanticism. Today, an Arabian prince conjures images of golden bathrooms in private jets the size of airliners and private zoos.

All this because of one company. That’s the kind of stuff that makes anyone unwilling to ask hard questions. If history is any guide, this will be the biggest payday ever.

Ponzi pulled off his scheme in a matter of mere months. Not because he did not want it to continue. It was more because it took less than a year to bring him to justice as he ran out of other people’s money. Ponzi was a schemer who used deception to remove his investors from their money.

A National Oil Company (NOC) like Saudi Aramco is a very different beast.

Most of the Saudi legacy oil fields are many decades old. The biggest – and most famous of them – Al Ghawar – clocks a more than 80-year history as a producing oil field. Yes, its a once in a lifetime field of unimaginable proportions. Oil production volume from Al Ghawar alone puts entire OPEC member countries to shame.

But no matter how big this field is, pumping oil at this level for so many decades cannot have happened without consequences. This means that reserve figures from Saudi Arabia must be taken with a truckload of salt. The same is true for production cost figures.

This is important. What would happen if the world came to believe that there is less oil still left in the sands? Or that producing this oil is more expensive than expected or both? It would have a major impact on the future profitability of the company. Today shale oil upends the equation for all drillers worldwide. At the same time, cash supply in countries like Saudi Arabia has gone from limitless to finite. What investors expect to see is potent stuff.

So, there is a clique of evil persons that makes anyone believe that the company is worth more than it is?

Not so fast.

Any hierarchic group of people that is more than a certain threshold becomes political. I like to put this at 50 people. Instead of doing their job, people start to hide inside the group. They shun responsibilities, skip work, and game the organization.

That’s a natural, unstoppable process. And it happens in any culture, in any country, in any age group, wherever you look.

When people make mistakes, they tend to hide them. Or they blame someone else. This person will then try to hide them or play them down in turn. He will window dress and make things appear better than they are. It’s not the data, it’s what light you shine on it.

This is an accretion process that builds up liabilities and fake data. It does so until the organization starts to feel its effects in ways that make survival a possibility. Not a certainty.

In other words, shit has stacked up to a point where the company is in serious trouble. Again, this is a very general process that all organizations are suffering from.

This is usually the moment when new management comes in. It cuts the slack, reorganizes, and puts the company through drastic reorganization. Even bankruptcy proceedings, whatever is required to remediate the problem. In extreme cases, the organization gets liquidated which resolves the problem for society.

Public administrations display those mechanisms too. Albeit they produce different results as liquidating them is not a prospect. The result is much more of the same bad thing.

What can a company do to clean up the mess?

Decisions and structures are questioned. A bright light is shone on problems. Some things get morphed to the point where the original problem is resolved. Or it is diminished enough so survival is assured.

Smaller, more entrepreneurially structured organizations are better at cleaning up their mess.

Not so in National Oil companies and never in big cash cows like Saudi Aramco.

Those organizations never need to worry about the skeletons in the cupboard. Endless cash flow always puts a thick layer of muck over any problem or issue the company may have. If flow rates are not as good as they need to be to trigger bonus payments, they get prettied up. Reserve figures are pimped for decades. Production cost gets trimmed on paper only to fit whatever financial model they need to fit.

It starts with the smallest employee who wants to be sure he gets his sliver in the spoils and deflects blame. And it goes up to the CEO and further. Nobody wants to know the reality. External companies chip in and play the game as they don’t want to lose the customer/partner.

In the end, nobody knows what’s real and whatnot. To get a sense of reality, one would have to disregard everything. All information that was reported and archived in the past is corrupted. The sanitizing must start from scratch. All pre-existing information must be assumed as tainted. To the point where it’s unusable.

But that won’t happen – as even those who want to invest in the Saudi Aramco IPO are not interested in reality. They want their pretty figures. They want their bonuses for having thrown money at something that has all the hallmarks of a superstar investment. Those making the decisions are not those investing their money. They take a gamble.

And they need something they can blame when things go awry. In an ideal world, it’s the one who makes a decision. But, this is what we have thrown in the scientific method for. 

As soon as there is some form of formula that can be applied, it makes the decisions for us. Sure enough, the formula is tweaked so it gives us the results we seek. It’s always humans that make the real decisions in the end but the subterfuge will hold for them.

What we want is deniability. To be able to say: “It’s not my fault”. Here is what’s to blame. Don’t look at me.

It was the model, the data – until it was not anymore and everything crashed to pieces.

Because even the resulting data needs interpretation. And this interpretation is then a judgment call – or an opinion if you will. But we mask those opinions as hard, not to be argued with data. We are back full circle – it’s not the machine – it’s us. But we can always pretend it was the machine and that’s fine for us.

This is the first article in a 3 part series. Don’t miss the sequel next week.

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